2012 (12) TMI 564 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Company from sufficient reserves has advanced to a Director substantial interested - Assessee contented that this is a trade transaction and the advance was given for purchase of contiguous land since the company was not authorised to purchase non-agricultural land in his name Held that - As the assessee has received advance from the company on 07-11-06 and 08-11-06 and whereas the payments for land have been made on 08-06-06 and 26-10-06. Assessee has only given a colour to the transactions so as to characterise the same as in the nature of trade advance. Therefore provisions of section 2(22)(e) are clearly attracted in the facts and circumstances. Appeal decides in favour of revenue

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.
2. Examination of the nature of the transaction between the assessee and Karnala Infrastructure Project Pvt. Ltd. (KIPL).
3. Determination of whether the advance received was for business purposes or personal use.
4. Impact of the assessee's utilization of the funds on the applicability of Section 2(22)(e).
5. Validity of the assessee's claim that the transaction was a commercial one.
6. Examination of the CIT(A)'s directive to consider accumulated profits up to the date of advance for determining deemed dividend.

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:
The primary issue in this case is whether the provisions of Section 2(22)(e) are applicable to the Rs. 1 Crore advance received by the assessee from KIPL. The AO and CIT(A) concluded that the provisions were applicable, as the assessee, holding a substantial interest (45% share) in KIPL, received an advance from a company with significant reserves.

2. Examination of the nature of the transaction between the assessee and KIPL:
The assessee claimed that the advance was received for acquiring contiguous land for KIPL, as per an agreement dated 07-11-2006. However, the AO observed that the payments made to farmers were prior to the receipt of the advance, indicating that the funds were not used as claimed by the assessee. The AO and CIT(A) found that the funds were instead used for personal expenses, including repayment of loans, renovation of a bungalow, and foreign travel.

3. Determination of whether the advance received was for business purposes or personal use:
The AO's analysis of the bank statements revealed that the funds were primarily used for personal purposes rather than for acquiring land for KIPL. The assessee's claim that the funds were used for business purposes was not substantiated by the evidence presented. The CIT(A) upheld the AO's findings, noting that the transaction appeared to be a ploy to avoid the provisions of Section 2(22)(e).

4. Impact of the assessee's utilization of the funds on the applicability of Section 2(22)(e):
The AO and CIT(A) concluded that the utilization of the funds for personal purposes rather than for the intended business transaction meant that the provisions of Section 2(22)(e) were applicable. The assessee's inability to demonstrate that the funds were used for acquiring land for KIPL further supported this conclusion.

5. Validity of the assessee's claim that the transaction was a commercial one:
The assessee argued that the transaction was a commercial one and that the provisions of Section 2(22)(e) should not apply. However, the AO and CIT(A) found that the transaction was not genuine and that the funds were used for personal purposes. The CIT(A) noted that the assessee's shareholder status was incidental and that the transaction was not conducted in the ordinary course of business.

6. Examination of the CIT(A)'s directive to consider accumulated profits up to the date of advance for determining deemed dividend:
The CIT(A) directed the AO to consider only the accumulated profits up to the date of the advance for determining the deemed dividend. This directive was based on the assessee's alternate contention. However, the CIT(A) upheld the AO's decision to invoke the provisions of Section 2(22)(e), as the transaction was not genuine and the funds were used for personal purposes.

Conclusion:
The appeal filed by the assessee was dismissed, with the Tribunal upholding the CIT(A)'s decision to apply the provisions of Section 2(22)(e) of the Income Tax Act, 1961. The Tribunal found that the funds were used for personal purposes, and the transaction was not conducted in the ordinary course of business. The assessee's arguments and reliance on various judicial decisions were not found to be applicable to the facts of the case.

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